Staff with a major say

Customers who shop at Armstrong Garden Centers and Pike Nurseries have likely interacted with the company’s owners. That’s because, of the 1,400 associates working there seasonally (1,100 year-round) — 1,184 of them are employee-owners who participate in the company’s employee stock ownership plan, or ESOP. Their nametags even say “owner,” indicating to customers just how invested these associates are in their company.

By giving associates a stake in ownership, Armstrong and Pike reap a multitude of benefits from the ESOP. At face value, the plan simply allows the company to reinvest in its associates by funding their retirement accounts with shares of stock. But the behavioral impact of that financial investment is what makes employee ownership so attractive to IGCs like Armstrong.

“I think the biggest benefit comes from having a team where everyone literally is encouraged to behave like an owner,” says Gwynn Lehigh, Armstrong’s vice president of human resources. “It changes the way in which you operate.”

ESOP companies and their employees tend to outperform their non-ESOP counterparts but this plan doesn’t work for everyone. While this ownership model can make a lot of sense for IGCs, it’s imperative to weigh the benefits and drawbacks when considering if an ESOP is right for your company.

Why ESOP?

When Don Rogers, Sr., was ready to retire as owner of Armstrong Garden Centers in 1987, he considered his options for selling the company. He looked to Wall Street, and then private investors, before he realized that the best people to run his company were already working there.

That’s when he decided to establish an ESOP, transferring ownership to his employees (160 at the time) instead of an outside buyer. Not only would the plan contribute to employees’ retirement savings; it paved Rogers’ path into retirement by continuing the legacy he’d built.

“One of the biggest struggles with many IGCs is looking at a succession plan if there’s not additional family looking to run the business,” Lehigh says. “That’s the situation Armstrong was in. [Rogers] felt so passionate [about] the garden center he helped build, that he wanted to turn it over to people who had the same passion and enthusiasm, who could take care of it the way it was intended to be run.”

More than two-thirds of ESOPs are established to create a market for the shares of a departing owner of a closely-held company, according to the National Center for Employee Ownership (NCEO). While there’s financial benefit in selling to an ESOP, because the owner gets fair market value for the business, it also provides priceless peace of mind that the business is in good hands.

“Most people who sell to ESOPs have invested a good portion of their lives and financial resources in their companies,” says Loren Rodgers, executive director of NCEO. “They want a fair price for the company, but they also care about the people affected by their business. They’ve seen what happens when an investor buys a company, and they hate the idea of their co-workers’ futures being in the hands of an absentee owner whose only interest is cash flow. They want to be sure that the next owner feels a sense of responsibility to the workforce and the communities they serve.”

This makes an ESOP particularly attractive as a succession plan for family-owned businesses when the next generation isn’t interested in taking over — a common plight in this industry, where about 90 percent of IGCs are family-owned.

Even if the next generation has the passion, Rodgers notes, they may not have capital to buy the business outright — which makes ESOP a financially sound option for transitioning ownership. “It often works out better, financially, for the next generation to participate through the ESOP instead of directly owning the shares,” he says.

Sweat equity

Associates at Armstrong are automatically enrolled in the company’s ESOP after one year of service, in which they worked at least 1,000 hours. They maintain enrollment each year they work 1,000 hours.

“It’s a great program because both our part-time and full-time associates get to participate, which is really unique in benefit plan participation,” says Lehigh, who has worked at Armstrong for 12 years.

“You enter the plan through sweat equity, so the more years you work here, the more ESOP shares you obtain.”

Rodgers says it’s not uncommon for highly seasonal ESOPs to lower those requirements. For example, at McKay Nursery Co., an employee-owned wholesale tree nursery in Wisconsin, seasonal workers only have to log 800 hours in a calendar year to participate in the ESOP.

After Armstrong Garden Centers acquired Pike Nurseries out of bankruptcy in 2008, Pike’s associates joined the ESOP, as well. The rollover didn’t happen until March 2015, after Armstrong bought out the remaining investors. But because the ESOP recognized original hire dates, Pike’s associates came in fully vested instead of waiting a year, like a new employee would.

Impacting behavior

Enrolling employees in an ESOP doesn’t automatically make them act like owners. To reap the behavioral benefits of employee ownership, companies must work constantly to build buy-in by educating and engaging employees to become “business partners,” Lehigh says.

Annual town hall meetings on both coasts bring together associates from Armstrong Garden Centers’ 31 locations in California, and Pike Nurseries’ 15 locations in Georgia plus two in North Carolina. Executives share company updates and discuss how the ESOP enables each employee to contribute to (and benefit from) the company’s success.

“We’ve used [the] ESOP as a platform to leverage conversation about driving our business,” Lehigh says. “We want associates to understand that: ‘What you do affects our profitability. Our profitability and the financial health of the company affect our ESOP share value. Our ESOP share value affects your personal ESOP account.’ The aha moment is, once people understand mechanically how it works, then they recognize, ‘This is what I can do to make a difference,’ and start to really behave like an owner.”

For example, Lehigh says the company focuses on inventory control by asking associates to consider how buying decisions affect them. This makes dump and shrink more personal because not only do they impact the company’s bottom line, but that impacts employees’ ESOP allocations. Buyers are taking ownership for store inventory now by treating the company’s money as their own — which it is, in essence, through the ESOP.

Is an ESOP right for you?

Despite the plan’s many benefits, “There are some companies that are not good fits for ESOPs,” Rodgers says.

For example, a company must generate enough cash to buy out the owner (or repay the loan) to fund the ESOP. Plus, payroll must be adequate to cover the purchase.

“ESOPs are not a great fit for small companies,” says Rodgers, noting that most have at least 30 employees. “Companies with unpredictable profitability or big swings from year to year find ESOPs more challenging; usually it’s harder for them to commit to the loan repayment schedule.”

To determine if an ESOP is right for your company, Rodgers recommends first talking to other businesses that have implemented it — “to see what it looks like in real life,” he says.

(And, if you need help finding an ESOP mentor in the garden industry, he says his team at NCEO is happy to make introductions.)

Companies seriously vetting an ESOP should begin with a business plan and work with an accountant to weigh the costs of buying the shares against the company’s cash flow and financial projections. If the numbers look promising, then bring in a valuation specialist to determine what your stock is worth and whether it’s feasible to sell shares through an ESOP. The next step would be hiring a qualified ESOP attorney to draft your plan and submit it to the IRS.

Of course, you’ll need a team committed to managing the plan, which Lehigh says requires a lot of time and investment. Because ESOPs are regulated by the Employee Retirement Income Security Act (ERISA), “you certainly get into many layers of government oversight, so you have to play by the rules of plan documents and plan statements,” she says. “We have a trustee committee that oversees it, and a third-party administrator that does the allocation.”

ESOPs can be complex, but if executed properly, the benefits are clear. Both Rodgers and Lehigh agree that the key to making ESOPs successful is the team of professional advisers and in-house ambassadors behind it.

“There’s a lot of work that goes into running an ESOP, and you’ve got to have a strong team to support it,” Lehigh says. “I don’t mean to sound cliché, but it takes a village.”

Brooke is a freelance writer living in Cleveland and a frequent contributor to Garden Center.